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Brazilian mills on edge as they fight an uphill battle

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SAO PAULO, Brazil Steel imports are a recent trend for Brazil, but volumes have been growing so relentlessly over the past few years that they are by far the main cause of apprehension among local steelmakers.

Brazilian government figures show that imports of flat carbon steel products have increased fivefold from some 275,000 tonnes in 2005 to 470,000 tonnes in 2006, 865,000 tonnes in 2007 and 1.37 million tonnes last year. And in the first half of this year the volume reached a surprisingly high 1.88 million tonnes, according to the Brazilian Ministry of Foreign Trade, representing nearly 25 percent of the 7.8 million tonnes (including stainless flat products) produced by local mills in the same period.

Data compiled by the Brazilian steel institute, Instituto Aço Brasil (IABr), shows even more alarming numbers. Overall steel imports totaled 2.73 million tonnes valued at $2.4 billion in the first half of this year, up nearly 84 percent by volume and 61 percent by value from the 1.49 million tonnes valued at $1.48 billion in the same period last year. IABr expects imports to total some 4.2 million tonnes this year. For 2009 as a whole, imports reached 2.33 million tonnes—led by cold-rolled coil (323,869 tonnes), hot-rolled coil (286,071 tonnes), heavy plate (235,899 tonnes) and hot-dip galvanized sheet (231,330 tonnes)—valued at $2.8 billion.

The primary reasons for the steep increases are high local steel prices and the devaluation of the U.S. dollar against the Brazilian real.

After years of economic growth in Brazil, improved local fundamentals and structural changes in the global economic landscape, the real got stronger. From a peak of 3.95 reais per U.S. dollar at the end of 2002 and around 2 reais in subsequent years, the currency now stands at around 1.73 reais per dollar.

Initially, the currency fluctuation only affected Brazilian steel exports, since finished steel imports were irrelevant considering the size of the domestic market. But without money flowing in from exports, trading companies were forced to look for an alternative—imports—and began chasing potential customers, especially large and medium independent flat steel distributors. A few years ago only a handful of companies in the country's southeastern region dared to purchase steel from the international market, facing a reported risk of retaliation by local mills, but Brazil now has countless flat steel buyers closing import deals all over the country.

In terms of pricing, Brazil's domestic steel prices have been among the highest globally. Until the end of August, hot-rolled coil for the distribution segment exceeded 2,000 reais ($1,155) per tonne ex-works—nearly double the United States domestic price of no more than $600 per tonne f.o.b. mill. The gap is mainly explained by the local market's long years of isolation, which enabled mills to maintain control of domestic prices.

Long steel products are another issue. Over the past few years only flat steel products were imported in any relevant volumes. But since the end of 2009 trading companies in Brazil have been purchasing more long steel and acting as intermediates for small, independent distributors. In the case of rebar—which until recently had strict, discouraging technical specifications—imports were quite low at 2,906 tonnes in 2007 and 1,470 tonnes in 2008, according to Ministry of Foreign Trade figures, but jumped to 28,818 tonnes last year and reached 72,500 tonnes in the first half of 2010. Rebar prices in Brazil exceed $1,400 per tonne vs. a little less than $600 per tonne in the U.S. market.

All of this has prompted mills, especially flat steel producers, to rethink their sales strategies. Since the beginning of this year, mills have found it difficult to implement price increases, and sources at distribution companies said mills are even offering some discounts to try discourage importing.

A "mini pricing war in the domestic (Brazilian) steel market is under way, mainly impacting the flat steel segment," Barclays Capital Plc said in a report at the end of August. Inventory levels in the distribution segment, representing some one-third of domestic sales by flat steel producers, are very high and mills might experience a destocking phase over the rest of the year, it added.

"In our view, the Brazilian steel market is facing a structural change and domestic players will have to adapt to higher levels of imports going forward," Barclays said, translating that into "lower pricing power."

Some mills have complained about the alleged dumping of some steel imports. Luis Fernando Martinez, commercial director at flat steel producer Cia. Siderúrgica Nacional (CSN), said in a recent conference call that there was evidence of dumping and the company was taking part in meetings with the Brazilian government to address the problem. "CSN is the one losing the most with the imports," he said.

Meanwhile, other sources said imports are decreasing and will remain low as prices in the international market gradually recover over the next few months. Whether they continue to decline remains to be seen, but right now the only certain thing is that imports are set to continue causing headaches in Brazil in the near future. JUAN WEIK

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